What happens to funds remitted during a bankruptcy case?

When you accumulate debt, you may be subject to a creditor lawsuit. If the lawsuit goes in the creditor's favor, the creditor may begin collecting on the debt in various ways including wage garnishment and a levy on your property.

If a wage garnishment judgment is issued, the creditor can contact your employer and have a percentage of your wages paid into the court which will eventually be remitted to the creditor. The employer must continue to garnish the debtor's wages until the debt has been paid in full or until the debtor's employment with the employer ends. Interest accrues until the debt is paid in full. The total judgment includes filing fees, court costs and attorney's fees.

Federal law provides that only 25% of the debtor's weekly disposable earnings may be garnished or alternatively, the amount by which weekly disposable earnings exceed thirty times the federal minimum hourly wage, whichever is less. However, certain debts such as child or spousal support and federal or state taxes are not subject to the cap.

Can Bankruptcy Stop a Wage Garnishment?

When you file for bankruptcy, you receive an immediate automatic stay which prevents creditors from pursuing collection efforts against you or your property. Among the prohibited actions in an automatic stay are wage garnishments.  

If you are subject to a wage garnishment at the time you file for bankruptcy, your attorney will then notify your employer, the court in which the garnishment action is pending, as well as the garnishing creditor about the bankruptcy filing. Any garnished funds you have already remitted to the court after the bankruptcy is filed must be returned to you.  Additionally the court will stay any further proceedings against you and the creditor must dismiss the garnishment action.

Talk with an experienced attorney to discuss the various bankruptcy laws to stop any garnishment action against you.